Chevron Signs Massive LNG Deals

Earlier today, Chevron Corp. (CVX - Analyst Report) -- the second-biggest U.S. energy company -- entered into multiple deals to sell nearly 3 million tons of liquefied natural gas (LNG) per annum from its Gorgon venture in Australia. The company said that its Australian subsidiaries have signed three binding long-term Sales and Purchase Agreements to supply LNG to Japan and South Korea.

As per the first contract, Chevron would provide 1.375 million tons of LNG a year to Japan’s Osaka Gas, while the second deal calls for the company to supply 1.1 million tons per annum to Tokyo Gas. Both the contracts span over a period of 25 years. The final agreement will see 0.5 million tons being exported to South Korea's GS Caltex (50% owned by Chevron) for up to 20 years. The combined value of the deals has been estimated at about A$70 billion ($60 billion) and are expected to commence in the second half of 2014.

Chevron holds a 50% operated interest in the $42 billion project, with the other partners being ExxonMobil Corp. (XOM - Analyst Report) and Royal Dutch Shell PLC (RDS.A - Analyst Report). The Gorgon gas fields, off the coast of Western Australia , are estimated to contain 40 trillion cubic feet of gas deposits and have an expected economic life of at least 40 years from the time of start-up. Chevron said that the venture will have an annual capacity to produce 15 million tons of LNG, with the first shipment expected in 2014.

Under the agreement, Chevron will also divest an equity share of 1.25% in the Gorgon project to Osaka Gas and another 1% to Tokyo Gas, thereby reducing Chevron's stake in the Gorgon venture to 47.75%.

We believe that the sales contracts represent an important milestone in Chevron’s efforts to commercialize its share of LNG from the Gorgon project and are a key step towards a final investment decision by the joint venture participants. The company expects further sales of Gorgon LNG in the coming months. ExxonMobil and Royal Dutch Shell have already signed deals to sell much of their share of Gorgon production to Asian importers, including PetroChina Co. Ltd. (PTR - Analyst Report).     

In a separate development, Chevron announced yesterday the start-up of Angola's Tombua-Landana offshore oil project. The company holds a 31% operated interest in the $3.8 billion deepwater development that began pumping oil on Aug. 19, a month ahead of schedule. The other partners in the venture are Total SA (TOT - Analyst Report), Eni SpA (E - Analyst Report), Angolan state-oil company Sonangol and Portugal's Galp Energia SGPS SA.

Located in 1,200 feet (366 meters) of water about 50 miles (80 km) off the Angolan coastline in the Block 14 area, Tombua-Landana is estimated to contain 350 million barrels of recoverable reserves. It is Chevron’s third deepwater project in the West African country and is expected to reach its maximum production of 100,000 barrels of crude oil per day in 2011.

The ramp-up of the Tombua-Landana development further underscores the robustness of Chevron’s current development project pipeline, which is considered to be among the best in the industry, projected to add more than 1 million oil equivalent barrels per day by 2011.

We currently rate Chevron shares as Neutral.

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